The Current State Of Hollywood Is Not Fine

Have a seat. I think I feel a manifesto coming on

Photo by Author using Dall-e

I think we all know or have heard of the problems in Hollywood at this point. It is multi-pronged and has a good deal of broad strokes and nuance. Most of the problems can be traced back to the ever expanding US and International Film production landscape, and the incentives that make them more attractive than Los Angeles, a contraction of the inventories of of studio made TV entertainment, and the rising costs of shooting in Los Angeles, and increasingly the United States.

I feel compelled by the amount of daily conversations I’m involved with, to put out there an argument for the current state of things, and hopefully some ideas for where we need to go from here. Spoiler Alert: The clear place to start is California’s tax incentive program. I’m just outlining all the reasons why it has to happen and now.

1. Follow the money, the data don’t lie.

   A new report from FilmLA greeted us with the awesome news that local production had dropped 20% to just 183 projects in 2023. Of the 990 projects available for location shooting, a drop that large is devastating. One could blame it on the strikes in 2023, however, shooting in LA has steadily declined for a while now. LA was used to shoot 23% of projects in 2021, 22% in 2022, and just 18% in 2023.

   Where did the projects go? They followed the money to the best tax incentives. The UK, Georgia, and Toronto lead the list. 

2. Exodus of the Film Community, “Should I stay or should I go now?”

   Crew members I have been talking to are all lamenting how increasing numbers of friends in the LA Film community are packing it in, and moving out of state. They are relocating to try using their craft in smaller markets, or just plain starting over in other industries.

   There is a reality to the effect on the local economy that the erosion of Film workers has. When healthy, the Film industry pays $43 Billion annually in salary to LA local workers. Any reduction of this salary base affects not only the City and State tax bases, but spending across the extended economy encompassing everything from grocery stores to restaurants to dry cleaners, and yes, eventually real estate values.

   As I’ve mentioned in other posts, the slow but steady exodus of skilled Film workers has the eerie echoes of Autoworkers leaving Detroit from say, 1995 to 2007, and we all know what happened to Detroit. Assembly plants moving to other States and Countries with better Corporate incentives, cheaper labor, and lower cost-of-living created a slow race to the bottom for what was once the Manufacturing center of the universe. Even with Government bailouts of the Auto Industry, Detroit has yet to recover. Can that really happen in Los Angeles? Take away a significant tax base in the middle class and it most certainly will.

3. As the epicenter of the Movie and TV Universe, California should have better Film incentives than any other place in the known Universe.

   I will keep beating this drum over and over. There is no excuse for this fact. Hollywood invented the Movie Business. For generations, California and its residents have invested their lives and the lives of their children in the Film industry whether they work in it or not. The community and all California residents have profited from the tax base it has provided for 100 years. Massive infrastructure has been built, and the world wants to come here to be part of it. We have a moral obligation to sustain it.

   Why do Georgia, New York, and most of Europe have better Film tax incentive programs than California? It shouldn’t be that way. New York has a program over twice the size of California, at $770 Million annually.Georgia’s program has no annual financial cap at all, and covers Above the Line and Below the Line costs, whileCalifornia only covers Below the Line with its $330 Million annual incentive program, and the award criteria is terrible. The projects that employ the most people, ie. gigantic studio tentpoles and Netflix streaming shows, take the majority of the money. The criteria completely leaves out mid-size indies, Linear TV, and TV Commercials by weighting it this way. 

   Across the pond, European Nation Countries have film programs heavily subsidized by their federal Governments and the EU itself. There is a lot of money in movie making, they are no dummies.

   You’re making me quote ‘The Dude’ from ‘The Big Lebowski,’ which anyone who knows me will say, would have eventually happened anyway: “This will not stand!!”

4. The Unions and Guilds need to band together or fall apart.

   There is only one real way to force the California Legislature to raise the tax credit and change the criteria for having a tax credit awarded to a production. The Guilds all have to band together and present themselves as a single voting block and aggressively lobby the Legislature and the Governor to make immediate changes to the Film incentive program. 

   Supporting each other in Labor disputes is one thing. That is important, if only done half-hearted at times, and with a good amount of residual resentment. But this? This is an existential crisis. Entire categories of Film workers could disappear, and not as a result of AI, I’ll cover that later. It will be from the simple fact that being a Grip, Gaffer or Sctipty may no longer be a financially viable profession for many people living in Los Angeles.

   While the Unions still have numbers that create a voting block that can turn an election, they need to approach Sacramento as one 200,000-person voting block. This needs to be done with an appropriate PR campaign and hardcore Lobbyists.

   Where does the funding come from for this? If the movie stars and their agents want to pony up, that would be a good start. The George Clooney’s of the world have been very willing to help out in the past. I think CAA and WME might have a few shekels to put in the ante as well. Time to put up or shut up for all the virtue signalers out there. If you are truly for Labor, pretending to support them by walking picket lines during the strikes while reorganizing your agencies to a profit model based on Sports doesn’t cut it. Yeah, we noticed.

5. Lobbying by other industries against Film Tax Credits is more than a bit hypocritical.

   Speaking of Lobbyists, two other industries in California vie for tax rebates and subsidies from the State and employ an army of Lobbyists to get them, Agriculture and Tech. 

   California subsidizes Agriculture to the tune of over $1 Billion a year through indirect subsidies in the form of water subsidies, income tax deductions, property tax deductions, and sales tax exemptions. This is all on top of the Federal subsidies California farms receive. I might also add that most of the farms in California are Corporate Mega-Farms, and not family or individual farms.

   Big Tech tax credits are even more significant. California subsidizes tech through a variety of programs, The California Competes Tax Credit (CCTC) pays tech companies to stay in California, $180 Million, the R&D Tax Credit, which allows tech companies to deduct a portion of their research and development expenses, this one is worth Billions. Apple, Meta, Google, and others are the main recipients. Employment Training Panel $103 Million for workforce training, Green Energy Subsidies, and $500 Million annually for renewable energy projects.

   Yes, tech companies also receive parts of the $330 Million Film tax credit through the studios they own also. So yes, as you slap your forehead at the size of Tech’s State incentives, consider that in light of these advantages, they are still looking to wring a few more dimes out by bringing production everywhere but where they receive their usual tax advantages.

   The obvious question would be; if tech now owns much of Hollywood, and the State is compensating them every which way from Sunday, is it really too expensive to shoot here? Or, is Hollywood going out of business throughthe greed of tech and the short-sightedness and willful complicity of our Legislators?

6. Studios are making long-term deals outside the State, and the State is doing nothing to intervene.

   In September Netflix CEO Ted Sarandos gave the Keynote Address at the annual RTS London confab. In it he said Netflix currently has 100 active productions shooting in the UK and is employing 30,000 film industry workers. 

   In Albuquerque, NM, Netflix has spent $575 Million in production on the refurbished stages they bought in 2018. They are currently spending $2 Billion to expand the facility. They are exponentially expanding the film community there as well. A far less experienced, though cheaper workforce.

   Meanwhile, in its home state of California, Netflix received the largest share of the Film Tax Incentive program. Of the $330 Million available in 2023, Netflix received $60.3 Million. For those of you following along with a calculator, that’s about 20% of the available funds. More than any other Studio. Their effective Corporate Tax Rate for 2023 was 12.5%, minus significant reductions from the State’s R&D tax credits, as-well-as stock options tax breaks, and other programs which reduced their low tax burden even further. 

   So then, with all of the handouts Netflix receives, why is the State not coming down on them to keep production here? The math speaks for itself, and they certainly have leverage. Or, are they paranoid that Netflix will relocate out of state? Spoiler alert: they will anyway.

   Over at WB/Discovery, they are in the process of trying to make a deal with the State of Nevada. Zazlov & company are willing to commit to spending $8.5 Billion in production in Nevada if they increase the tax incentive program. Nevada will and so will WB. 

   The argument I keep hearing is that it is too expensive to shoot in Los Angeles. Sure, it’s a bit more expensive, but one could point out the State R&D tax exemptions these companies receive more than makeup for those added costs. Does the tax incentive program need to be increased and the criteria revised? Sure it does. But, in the case of Netflix and WB, they are taking all the California tax credits, and going out of state to make it that much cheaper at the expense of the local economy. They are truly having their cake and eating it too, and Sacramento is letting them.

7. The move towards Sports is quickly eroding the culture of Hollywood and subjugating the Film Industry.

   With the recent tussles over Pro Football and Soccer packages and games ending up on Amazon, YouTube, and Max, WME investing heavily in various Pro Fighting leagues, CAA’s massive sports division, to say nothing of the IMG/WME mash-up, one has to wonder what business we’re in when studios and agencies are making such a dramatic shift to sports as a foundational business.

   It hasn’t been sudden of course. The death of packaging and the studio contractions have combined to accelerate this dynamic as the bigger companies fight for overall market share.

   I’m all for diversification but, entertainment money only goes around so far. The resources for making narrative stories are becoming so thin as to affect the viability of making films in their traditional sense.

8. Forget about AI for now, we have bigger fish to fry

   I’m very tired of talking about AI’s influence over the current travails of Hollywood. The fact is, AI has been working in Hollywood for 20 years already, mostly used in post and VFX applications. If they can use it to put James Cagney in the next Deadpool movie, I’m all for it as long as the estate is compensated fairly.

   What I am taking issue with is how much it overshadowed the work stopages last year while the working crews were hung out to dry. If AI were going to take over, it would have been during the strikes and immediately after, but it didn’t because AI in Cinema is still way too under-developed, and overly expensive to employ, and mark my words will remain too expensive.

   If you look at the AI Companies, OpenAI, Anthropic, etc they are leaning in heavily on Language Learning Models (LLMs.) The best uses for LLMs are scientific research, medical diagnosis and thought partnering. AI visual creation on platforms such as Sora, is still very much in the “Party Trick” phase.

   Even when AI can create a 2-hour movie, the more developed it becomes, the cost to create a 120 page, visual narrative will tax the LLMs to the limit while the providers such as OpenAI, etc. will be trying to monetize it for maximum profit, therefore making it too expensive to use for something as frivolous as art. The AI company's valuations to revenues ratio are still woefully out of wack, and this more than anything else will dictate its future.

   Considering the contraction we’re experiencing now, the cost of AI use in actual physical production needs many iterations still before a film set can be fully automated. Also, the AI industry is headed in a different direction, so real threats are probably at least 10 years away.

9. The TikTok Effect

   TikTok has 1.7 Billion users…. Billion. If I said nothing else, the number should speak for itself and the consequent erosion away from traditional media. 

   For younger generations, this has become their main source of entertainment. The platform is so disruptive, and the algorithm is so addictive, that there are several Congressional inquiries into its effect on younger users. The TikTok ban is still out there, but there is so much US-based investment money tied up in the company, at best it only changes hands to an entity that is not beholden to the Chinese Government.

   TikTok and other platforms such as Instagram’s “Reels” are a huge part of the movie and TV audience being lost. The real reason movie theaters are empty is that the 18-24-year-old viewer has moved on to smaller screens with shorter content. Did this happen during the Pandemic? The rise of TikTok and the Pandemic as a period do track together, but the main problem is that for entertainment younger people have traded longer stories for the quick Dopamine hit provided by an addictive algorithm that knows exactly what you want to see to get that hit.

   Knowing this, where are entertainment producers and advertisers supposed to spend their money?

10. Tourism is the Climate Change crisis of Los Angeles.

    Back in 2005 or so, I had family visiting from the East Coast. As tourists, the top of their wish list was to go to Universal and take the Tram tour around the backlot. It was just another trip around the back lot for me, one of the 1000 I had done before. Mid-way through the tour, we came around the corner and there was Tony Shaloub sittingin a rigged-up red convertible shooting a scene for ‘Monk.’ Everyone started shouting, and to his credit, he turned around and waved. For me, running into that scene on the backlot was business as usual. But, for them, it was the memory of a lifetime.

    I sit in an office overlooking Robertson Boulevard, and the TMZ bus rolls by on the hour. Why? The Ivy is across the street and the tourists are looking for a celebrity sighting. So, If no shows are shooting around town, and if the celebrities all move out of town because there’s no real reason to be in the heart of it all? Over 50 Million visitors come each year to see the sights in Los Angeles. If the erosion of the local economy’s tax base from abandoning the Film Industry results in Urban blight, what are they coming to see in Hollywood? The stars on the Hollywood Walk of Fame where Homeless people aren’t already sitting?

    There is a misunderstanding that California’s multi-billion dollar Tourism revenue won’t be affected by Hollywood’s implosion. It absolutely will. The tourism spending numbers are already down from the pre-Pandemiclevel of $38 Billion in 2019, to $26 Billion in 2023. I have to think a weakened Film economy is at least partially to blame. That is a spending reduction of 1/3 over the last five years. One would think this would be a cause for alarm, but no such alarm has been sounded. If the California Legislature wants budget deficits permanently, screw with tourism and stop giving them a reason to come here. How long do they want to let those numbers fall before they do something significant to keep production in Hollywood?

    Conclusion

    What’s it going to be Governor Newsom? What’s it going to be State Legislature? Are you going to put a viable tax incentive program in place, or not?

    The math is out there already. Every 1 dollar in tax incentives returns $24.40 in economic output per a recent California Film Commission report. That is a 2440% return on investment. People say there is a budget deficit, and the State can’t afford to raise the tax incentives. I say the State can’t afford not to.

    If you are afraid of deficits, realize that the $24.40 per dollar spent is actual revenue. Propping up Hollywood, and creating the best tax incentives you can find worldwide is a tangible way to avoid future budget shortfalls, and the demise of an entire industry.

    Wake up people, time is running out.